THE issues before the Bench are - Whether when the assessee is
a school certificate examination body, a mere hike in fees to general surplus
would exclude it from the ambit of Sec 10(23)(vi); Whether a provision of
service in the nature of charity would not cease to be charitable only because
it entails receiving a charge for the same and Whether merely because the funds
of the assessee may not have been utilized in the best possible manner cannot
lead to a conclusion that they have not been applied to the object for which the
assessee has been established. And the
verdict goes against the Revenue.
Facts of the
case
The assessee challenged the order passed by DGIT(E) refusing to grant exemption u/s 10(23C)(vi). The assessee is a society registered under Societies Registration Act and is listed as a body conducting public examinations under Delhi School Education Act. The assessee applied for approval u/s 10(23C)(vi) for AY 1999-2000 to 2001-02 to CBDT which was rejected by CBDT stating that it was not an educational institution but was an examination body which conducts examinations for ICSC and ISC and therefore, could not be granted the exemption as an educational institution.
It also filed application for approval u/s 10(23C)(vi) for subsequent years, which were not disposed off. For AY 2008-09 to 2010-11, DGIT (E) dismissed the application on the ground the assessee was not an educational institution but an examination body conducting examinations for ISCE and ISC.
The assessee challenged the said order and the High Court disposed by an order holding that the assessee is an educational institution as contemplated u/s 10(23C)(vi) and the matter was remanded to DGIT (E) to pass an order in accordance with the law.
DGIT (E) again rejected the claim of assessee stating that assessee failed to justify its claim on the ground that the assessee had failed to justify its claim that it did not exist for the purposes of profit. DGIT (E) held that the assessee had conducted its affairs in a systematic manner to earn profits and the same were diverted in a clandestine manner. It was further observed that auditor had pointed in the report regarding lapse while awarding contract and thus, it was held that it was unable to form an opinion on whether the accounts showed a true and fair view.
The assessee contended that it was a society established to promote education which included the promotion of science, literature, the fine arts and the diffusion of useful knowledge by conducting school examinations. Upto 1998-99, it was exempt u/s 10(22). The criteria for exemption u/s 10(22) of the Act as existing prior to 01.04.1999 was identical to the criteria for exemption u/s 10(23C). Therefore, the assessee ought to be granted the said exemption. Further as per Rules of the assessee, the application of income was solely for the promotion of its object as set-forth in the Memorandum and prohibits the transfer of income and property of the society, directly or indirectly, by way of profit, dividend and bonus to the persons, who at any time are or have been members of the r society and also prohibited the payment of remuneration to its members. None of the portion of its income was spent for other than its objects. The fee was increased in order to create the resources as required for future expansion, modernization, development and construction of the building. However after considering the sufficiency of available resources and the future requirement of funds, the assessee reduced the fee to a great extent and the surplus in various years cannot be made basis for refusal of approval u/s 10(23C)(vi). Regarding contract for IT enabled services, the payments were not released as the website stopped working and it demanded a refund of the amount paid and ultimately succeeded in receiving back amount in full and final settlement of its claims.
Revenue contended that the assessee was functioning for profit purposes in the garb of education and, therefore, was not entitled to any exemption. The activities of the assessee were not genuine and the same were purely on commercial basis. The huge surplus had not been applied towards the achievement of the objectives of the assessee, which were merely paper clauses. The main object of the assessee was to conduct examinations and to award certificates and the petitioner was charging fees as “Registration & Affiliation charges”, “Examination charges”, “Eligibility Charges Class XI”, “Recheck Charges”, etc. for the same. The steep hike per student, indicated that the assessee was only a profit making organization and the subsequent roll back of the fee was an afterthought to get the continued exemption. It was further contended that the auditor of the assessee in his report also advised investigation of the financial affairs. Revenue contended that the fact that the assessee had been previously granted exemption under Section 10(22) or 10(23C)(vi) of the Act, did not guarantee that the exemption will apply mechanically for all subsequent assessment years.
After hearing both the parties, the High Court held that,
++ the assessee has 1750 schools which are affiliated to it and provide education from nursery to twelfth standard. It selects the courses, syllabus, books and literature for different standards to be studied by the students in order to maintain a uniform standard throughout India. The assessee is recognized and listed as a body conducting public examinations under the Delhi School Education Act, 1973. It conducts examinations (ICSE and ISC) of the students who have completed their studies and awards certificates to the successful students. The assessee, in order to maintain the standard of education and to make the teachers aware of the latest developments in the education field, from time to time undertakes, supports and promotes study and research and also holds training conferences and seminars for the teachers;
++ the rules and by laws of the assessee prescribe distribution of any surplus and it is specified that funds/surpluses of the assessee would be utilised solely for its objects. The aims and objects, as well as the activities undertaken by the petitioner, fall within the definition of “charitable purposes” under section 2(15) of the Act. Even though, the objects and by laws of the petitioner are clear and unambiguous, the respondent has come to a conclusion that the petitioner is being run for generation of profit. This conclusion has been arrived at only for the reason that the petitioner has been generating surplus from its activities. Petitioner’s main source of funds is from charging fees from schools for registration and affiliation and fees charged from the students who are enrolled to take the exams conducted by the petitioner. The petitioner had been charging a uniform fee for several years. The fact that the petitioner had generated certain profits would not dilute the purposes for which the petitioner has been established. There is no dispute that the activity carried on by the petitioner is solely in the field of education. It is also important to note that there is no distribution of the surplus accumulated by the petitioner. A provision of service in the nature of charity would not cease to be charitable only because it entails receiving a charge for the same. The nature of the activity carried on by an entity would be the predominant factor to determine whether the purpose of the organization is charitable. It is not necessary that a charitable activity entails giving or providing a service and receiving nothing in return. Collection of a charge for providing education would, nonetheless, be charitable provided, the funds collected are also utilised for the preservation of the charitable organization or for furtherance of its objects. In the present case, if the surpluses have been generated for the purposes of modernising the activities and building of the necessary infrastructure to serve the object of the organisation, it would be erroneous to construe that the generation of surpluses have in any manner negated or diluted the object of the organization;
++ generation of profit and its distribution is not the object of the society. The fact that surpluses have been generated in order to build the infrastructure for modernising the operation, is clearly in the nature of furthering the objects of the society rather than diluting them. Therefore, the conclusion of the Revenue that the increase in the fees for generating surplus would by itself exclude the assessee from the ambit of Section 10(23C)(vi) of the Act is clearly erroneous. Generation of profit or surplus by an organization cannot be construed to mean that the purpose of the organization is generation of profit/surplus, as long as the surpluses generated are accumulated/utilized only for educational purposes;
++ the another reason given by revenue for rejecting the application of the society is that the auditor of the assessee had expressed reservations with respect to the final accounts of the society. A perusal of the observations made by auditors indicates that the objections were, essentially, three fold. First of all, the auditors had made observations to the effect that the petitioner had not specified in detail the list of deliverables and schedule of works which were required to be performed by RJB-APL. Secondly, the auditor had pointed out procedural lapses with respect to obtaining the authority for entering into the contract with ‘R’ and thirdly, the auditor had stated that they were unable to ascertain the nature and quantum of work since the same had not been verified and certified by an independent IT expert. On the basis of these observations, revenue held that the activities of the petitioner were not genuine. The fact that the petitioner conducts the examination for class 10th and 12th students with respect to schools that are affiliated with the petitioner is indisputable. The nature of the predominant activity, therefore, cannot be questioned. There is no doubt about the genuineness of this activity of the petitioner, thus the conclusion drawn by the respondent that the activities of the petitioner were not genuine merely because a contract entered into by the petitioner has been brought into question, is not warranted. However, the observations made by the auditor raise a separate question with respect to the application of the funds of the petitioner company;
++ the question that needs to be addressed is whether the petitioner would be disentitled to the exemption under Section 10(23C)(vi) of the Act on account of falling foul of the third proviso to Section 10(23C). Petitioner entered into an agreement with ‘R’ for the purpose of computerization and development of IT enabled system. In view of the objections raised by the auditor as well as several complaints received from affiliated schools, payments to ‘R’ were withheld. The dispute was subsequently settled. Any expenditure incurred by an assessee for computerisation and developing an IT enabled system for carrying on its activities would be application of its resources wholly and exclusively for its purposes. The exemption u/s 10(23C) is available provided that the income of the assessee is applied “wholly and exclusively to the objects for which it is established”. And, it cannot be disputed that the contract entered into with ‘R’ was for furthering the object for which the petitioner was established. Clear distinction must be drawn between inefficient utilization of funds and utilization of funds for objects other than that for which a society has been established. Merely, because the funds of the petitioner may not have been utilized in the best possible manner cannot lead to a conclusion that they have not been applied to the object for which the petitioner has been established. A management of a society which is either negligent or has not performed its functions diligently with the requisite skill may be guilty of mismanaging the affairs of the society. But it would be quite another thing to state that the funds have not been deployed wholly and exclusively for its objects. The amount incurred by the petitioner for modernization and computerization cannot be stated to be for the purposes other than the object as specified in the petitioner’s charter. The same cannot be mistaken to be deployed for any other purpose. The reasonableness of the amount spent and the quality of the decisions of the management are not the subject matter in respect of which the satisfaction of the Prescribed Authority is required. The manner in which the affairs of the assessee are conducted, including determining which expenditure to incur and to what extent, is entirely within the discretion of the assessee;
++ Section 10(22), which was the applicable provision for the exemptions prior to introduction of Section 10(23C)(vi) of the Act, provided for exemption in respect of income of a university or other educational institution, existing solely for educational purpose and not for purpose of profit. Section 10(23C) of the Act was introduced, as the earlier provision (Section 10(22)) did not contain any mechanism for monitoring and in absence of the same, the exemption provision was being misused. With the introduction of 10(23C), prior approval is required from the prescribed authority by making an application for the same and the assesse would have to comply with the conditions imposed by the provisos to Section 10(23C) of the Act. In the event an institution fell within the expression: “exists solely for educational purposes and not for profit”, the institution was entitled to avail the exemption under Section 10(22) of the Act and there were no other conditions that were required to be complied with. Section 10(23)(vi) was analogous to Section 10(22) and to that extent the law laid down with respect to the eligibility condition u/s 10(22) would be equally applicable in cases u/s 10(23)(vi);
++ the stage of grant of approval and the stage for examining whether the third proviso to Section 10(23C) of the Act are complied with are different. Whereas, the exemption is liable to be granted at the beginning of the relevant year, the question whether the third proviso has been complied with would have to be viewed at the end of the relevant year. The assesse was non compliant with the third proviso to Section 10(23C) of the Act, the approval would be revoked under the thirteenth proviso to Section 10(23C) of the Act. Denial of exemption u/s 10(23C)(vi) to an Institution which exists solely for educational purposes and not for profit, on account of non compliance with the third proviso would be limited to the relevant years during which the proviso has been violated.
The assessee challenged the order passed by DGIT(E) refusing to grant exemption u/s 10(23C)(vi). The assessee is a society registered under Societies Registration Act and is listed as a body conducting public examinations under Delhi School Education Act. The assessee applied for approval u/s 10(23C)(vi) for AY 1999-2000 to 2001-02 to CBDT which was rejected by CBDT stating that it was not an educational institution but was an examination body which conducts examinations for ICSC and ISC and therefore, could not be granted the exemption as an educational institution.
It also filed application for approval u/s 10(23C)(vi) for subsequent years, which were not disposed off. For AY 2008-09 to 2010-11, DGIT (E) dismissed the application on the ground the assessee was not an educational institution but an examination body conducting examinations for ISCE and ISC.
The assessee challenged the said order and the High Court disposed by an order holding that the assessee is an educational institution as contemplated u/s 10(23C)(vi) and the matter was remanded to DGIT (E) to pass an order in accordance with the law.
DGIT (E) again rejected the claim of assessee stating that assessee failed to justify its claim on the ground that the assessee had failed to justify its claim that it did not exist for the purposes of profit. DGIT (E) held that the assessee had conducted its affairs in a systematic manner to earn profits and the same were diverted in a clandestine manner. It was further observed that auditor had pointed in the report regarding lapse while awarding contract and thus, it was held that it was unable to form an opinion on whether the accounts showed a true and fair view.
The assessee contended that it was a society established to promote education which included the promotion of science, literature, the fine arts and the diffusion of useful knowledge by conducting school examinations. Upto 1998-99, it was exempt u/s 10(22). The criteria for exemption u/s 10(22) of the Act as existing prior to 01.04.1999 was identical to the criteria for exemption u/s 10(23C). Therefore, the assessee ought to be granted the said exemption. Further as per Rules of the assessee, the application of income was solely for the promotion of its object as set-forth in the Memorandum and prohibits the transfer of income and property of the society, directly or indirectly, by way of profit, dividend and bonus to the persons, who at any time are or have been members of the r society and also prohibited the payment of remuneration to its members. None of the portion of its income was spent for other than its objects. The fee was increased in order to create the resources as required for future expansion, modernization, development and construction of the building. However after considering the sufficiency of available resources and the future requirement of funds, the assessee reduced the fee to a great extent and the surplus in various years cannot be made basis for refusal of approval u/s 10(23C)(vi). Regarding contract for IT enabled services, the payments were not released as the website stopped working and it demanded a refund of the amount paid and ultimately succeeded in receiving back amount in full and final settlement of its claims.
Revenue contended that the assessee was functioning for profit purposes in the garb of education and, therefore, was not entitled to any exemption. The activities of the assessee were not genuine and the same were purely on commercial basis. The huge surplus had not been applied towards the achievement of the objectives of the assessee, which were merely paper clauses. The main object of the assessee was to conduct examinations and to award certificates and the petitioner was charging fees as “Registration & Affiliation charges”, “Examination charges”, “Eligibility Charges Class XI”, “Recheck Charges”, etc. for the same. The steep hike per student, indicated that the assessee was only a profit making organization and the subsequent roll back of the fee was an afterthought to get the continued exemption. It was further contended that the auditor of the assessee in his report also advised investigation of the financial affairs. Revenue contended that the fact that the assessee had been previously granted exemption under Section 10(22) or 10(23C)(vi) of the Act, did not guarantee that the exemption will apply mechanically for all subsequent assessment years.
After hearing both the parties, the High Court held that,
++ the assessee has 1750 schools which are affiliated to it and provide education from nursery to twelfth standard. It selects the courses, syllabus, books and literature for different standards to be studied by the students in order to maintain a uniform standard throughout India. The assessee is recognized and listed as a body conducting public examinations under the Delhi School Education Act, 1973. It conducts examinations (ICSE and ISC) of the students who have completed their studies and awards certificates to the successful students. The assessee, in order to maintain the standard of education and to make the teachers aware of the latest developments in the education field, from time to time undertakes, supports and promotes study and research and also holds training conferences and seminars for the teachers;
++ the rules and by laws of the assessee prescribe distribution of any surplus and it is specified that funds/surpluses of the assessee would be utilised solely for its objects. The aims and objects, as well as the activities undertaken by the petitioner, fall within the definition of “charitable purposes” under section 2(15) of the Act. Even though, the objects and by laws of the petitioner are clear and unambiguous, the respondent has come to a conclusion that the petitioner is being run for generation of profit. This conclusion has been arrived at only for the reason that the petitioner has been generating surplus from its activities. Petitioner’s main source of funds is from charging fees from schools for registration and affiliation and fees charged from the students who are enrolled to take the exams conducted by the petitioner. The petitioner had been charging a uniform fee for several years. The fact that the petitioner had generated certain profits would not dilute the purposes for which the petitioner has been established. There is no dispute that the activity carried on by the petitioner is solely in the field of education. It is also important to note that there is no distribution of the surplus accumulated by the petitioner. A provision of service in the nature of charity would not cease to be charitable only because it entails receiving a charge for the same. The nature of the activity carried on by an entity would be the predominant factor to determine whether the purpose of the organization is charitable. It is not necessary that a charitable activity entails giving or providing a service and receiving nothing in return. Collection of a charge for providing education would, nonetheless, be charitable provided, the funds collected are also utilised for the preservation of the charitable organization or for furtherance of its objects. In the present case, if the surpluses have been generated for the purposes of modernising the activities and building of the necessary infrastructure to serve the object of the organisation, it would be erroneous to construe that the generation of surpluses have in any manner negated or diluted the object of the organization;
++ generation of profit and its distribution is not the object of the society. The fact that surpluses have been generated in order to build the infrastructure for modernising the operation, is clearly in the nature of furthering the objects of the society rather than diluting them. Therefore, the conclusion of the Revenue that the increase in the fees for generating surplus would by itself exclude the assessee from the ambit of Section 10(23C)(vi) of the Act is clearly erroneous. Generation of profit or surplus by an organization cannot be construed to mean that the purpose of the organization is generation of profit/surplus, as long as the surpluses generated are accumulated/utilized only for educational purposes;
++ the another reason given by revenue for rejecting the application of the society is that the auditor of the assessee had expressed reservations with respect to the final accounts of the society. A perusal of the observations made by auditors indicates that the objections were, essentially, three fold. First of all, the auditors had made observations to the effect that the petitioner had not specified in detail the list of deliverables and schedule of works which were required to be performed by RJB-APL. Secondly, the auditor had pointed out procedural lapses with respect to obtaining the authority for entering into the contract with ‘R’ and thirdly, the auditor had stated that they were unable to ascertain the nature and quantum of work since the same had not been verified and certified by an independent IT expert. On the basis of these observations, revenue held that the activities of the petitioner were not genuine. The fact that the petitioner conducts the examination for class 10th and 12th students with respect to schools that are affiliated with the petitioner is indisputable. The nature of the predominant activity, therefore, cannot be questioned. There is no doubt about the genuineness of this activity of the petitioner, thus the conclusion drawn by the respondent that the activities of the petitioner were not genuine merely because a contract entered into by the petitioner has been brought into question, is not warranted. However, the observations made by the auditor raise a separate question with respect to the application of the funds of the petitioner company;
++ the question that needs to be addressed is whether the petitioner would be disentitled to the exemption under Section 10(23C)(vi) of the Act on account of falling foul of the third proviso to Section 10(23C). Petitioner entered into an agreement with ‘R’ for the purpose of computerization and development of IT enabled system. In view of the objections raised by the auditor as well as several complaints received from affiliated schools, payments to ‘R’ were withheld. The dispute was subsequently settled. Any expenditure incurred by an assessee for computerisation and developing an IT enabled system for carrying on its activities would be application of its resources wholly and exclusively for its purposes. The exemption u/s 10(23C) is available provided that the income of the assessee is applied “wholly and exclusively to the objects for which it is established”. And, it cannot be disputed that the contract entered into with ‘R’ was for furthering the object for which the petitioner was established. Clear distinction must be drawn between inefficient utilization of funds and utilization of funds for objects other than that for which a society has been established. Merely, because the funds of the petitioner may not have been utilized in the best possible manner cannot lead to a conclusion that they have not been applied to the object for which the petitioner has been established. A management of a society which is either negligent or has not performed its functions diligently with the requisite skill may be guilty of mismanaging the affairs of the society. But it would be quite another thing to state that the funds have not been deployed wholly and exclusively for its objects. The amount incurred by the petitioner for modernization and computerization cannot be stated to be for the purposes other than the object as specified in the petitioner’s charter. The same cannot be mistaken to be deployed for any other purpose. The reasonableness of the amount spent and the quality of the decisions of the management are not the subject matter in respect of which the satisfaction of the Prescribed Authority is required. The manner in which the affairs of the assessee are conducted, including determining which expenditure to incur and to what extent, is entirely within the discretion of the assessee;
++ Section 10(22), which was the applicable provision for the exemptions prior to introduction of Section 10(23C)(vi) of the Act, provided for exemption in respect of income of a university or other educational institution, existing solely for educational purpose and not for purpose of profit. Section 10(23C) of the Act was introduced, as the earlier provision (Section 10(22)) did not contain any mechanism for monitoring and in absence of the same, the exemption provision was being misused. With the introduction of 10(23C), prior approval is required from the prescribed authority by making an application for the same and the assesse would have to comply with the conditions imposed by the provisos to Section 10(23C) of the Act. In the event an institution fell within the expression: “exists solely for educational purposes and not for profit”, the institution was entitled to avail the exemption under Section 10(22) of the Act and there were no other conditions that were required to be complied with. Section 10(23)(vi) was analogous to Section 10(22) and to that extent the law laid down with respect to the eligibility condition u/s 10(22) would be equally applicable in cases u/s 10(23)(vi);
++ the stage of grant of approval and the stage for examining whether the third proviso to Section 10(23C) of the Act are complied with are different. Whereas, the exemption is liable to be granted at the beginning of the relevant year, the question whether the third proviso has been complied with would have to be viewed at the end of the relevant year. The assesse was non compliant with the third proviso to Section 10(23C) of the Act, the approval would be revoked under the thirteenth proviso to Section 10(23C) of the Act. Denial of exemption u/s 10(23C)(vi) to an Institution which exists solely for educational purposes and not for profit, on account of non compliance with the third proviso would be limited to the relevant years during which the proviso has been violated.
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